Recent CMBS modifications, sales prompt Trepp to warn investors

Loan modifications and note sales in the commercial real estate space have analysts at Trepp warning investors to be vigilant with their trading. According to the data firm's latest report, two specific CMBS deals incurred severe losses when they were modified or sold, and wiped out several investor classes.
The first was modification on a $106 million loan backed by four Washington Mutual Irvine Campus office buildings in Irvine, Calif., a total of 415,000 square feet. The complex was built in 1989 and, at the time the loan was securitized, was 100% occupied.
However, in September 2008, Washington Mutual was seized by the Office of Thrift Supervision and later taken over by JPMorgan(JPM). The loan last paid interest in May 2009, according to Trepp.
"As part of the takeover — according to special servicer notes — the (Federal Deposit Insurance Corp.) was left with the leases on the Irvine Campus properties," Trepp said. "Those leases were ultimately rejected in June 2009 — making it impossible for the property to generate enough cash to pay debt service."
The property's modification decreased the loan balance to $55.4 million, or by 45%. The maturity date for the loan also moved further out, to November 2018 from December 2011.
The loan, originally sponsored by Maguire Properties, will be interest only for 36 months and then begin amortizing. According to Trepp, the writedown eliminated classes H through L for the securitized pool. The G class was also written off by about half.
Trepp warned that, as bad as things have been for the securities pool of which the Washington Mutual deal is a part of, "the worst may not have come yet." Washington Mutual Irvine Campus was the third largest deal in the pool, representing 7.9% of the deal's collateral.
"Still to come is the resolution of the $142 million, Tri-County Mall loan, that has an appraisal reduction of $88.3 million," Trepp said, adding that reduction would take losses all the way up to the C tranche. The loan is in the same pool as the Irvine campus property.
The second deal that Trepp notes in its report is the sale of a $156.9 million loan on the Springfield Mall in Virginia at a $42 million discount. The buyer is Vornado Realty Trust, which is also the current property owner.
Trepp, citing an article by Commercial Real Estate Direct, said the loan was split in two securities pools, both from the late 1990s. The first slice, $78.4 million, represented the deals second largest asset at 6.6% of the collateral. The other half of the loan, $78.5 million, represented the third largest asset in its pool at 6.7% of the collateral.
"Since the article states that the note was purchased for $115 million, we assume that the deal will be getting $57.5 million from which accrued interest and fees will be taken out," Trepp said. "That will mean a big chunk of the A-1C class from that deal should be repaid in the very near term."
Classes at the bottom of the credit stack, i.e. B-5 and B-6 for the first half of loan and classes L and K for the second, are likely to be wiped out, Trepp added.
"Again, it would be wise to review your cashflow assumptions for the bond before thinking about paying above par," Trepp said. "Tread carefully."
Write to Christine Ricciardi.